## **Learning Outcomes**

After completing this article, you will be able to explain the principles of Kaizen costing and its role in continuous improvement for strategic cost management. You will distinguish Kaizen costing from traditional methods, identify how it applies to both manufacturing and services, and evaluate its benefits and challenges. You will also be able to apply Kaizen principles in practical scenarios as required in the ACCA Performance Management exam.

## **ACCA Performance Management (PM) Syllabus**

For ACCA Performance Management (PM), you are required to understand advanced costing techniques, including modern approaches to cost management and continuous improvement. This article addresses:

- The concept and process of Kaizen costing in a continuous improvement environment
- Comparison of Kaizen costing with standard and target costing
- The application of continuous improvement for cost reduction and performance enhancement in practice
- The behavioural and practical implications of Kaizen costing for staff motivation and strategic objectives

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What is the main goal of Kaizen costing in strategic cost management?
2. Kaizen costing differs from standard costing by focusing on:
   a) Achieving static cost standards  
   b) Continuous cost reduction  
   c) Allocating overheads  
   d) Setting long-term budgets
3. True or false? Kaizen costing is only suitable for manufacturing industries.
4. List two key success factors for implementing Kaizen costing in an organisation.

## **Introduction**

Modern business faces continual pressure to offer better value, reduce costs, and improve quality. Traditional approaches often focus on setting a one-off standard or target cost before launch. However, to remain competitive, organisations increasingly pursue **continuous improvement** after a product or service is live.

Kaizen costing is a key technique in continuous improvement, emphasizing ongoing, incremental cost reductions during the operational phase. Rather than setting a fixed cost standard and stopping, Kaizen encourages staff at all levels to identify and act on opportunities for savings and efficiency. Understanding Kaizen costing is essential for ACCA PM as it links strategic cost management to long-term competitiveness and staff engagement.

> **Key Term: Kaizen costing**
> A system of cost reduction and control based on continuous, incremental improvements made during the production or service delivery phase, typically through small, frequent enhancements suggested by operational staff.
>
> **Key Term: Continuous improvement**
> An ongoing effort to improve products, services, or processes by making small, incremental changes routinely, rather than relying solely on major innovations or breakthroughs.

## **KAIZEN COSTING IN STRATEGIC COST MANAGEMENT**

Unlike traditional standard costing, where a cost target is set and performance is measured against that benchmark, Kaizen costing expects the current standard to be reduced continuously by minor but regular improvements. This aligns with a strategy of cost leadership and process excellence.

- **Focus:** Kaizen aims for 'many small wins' achieved daily by operators and staff.
- **Timing:** It is applied after product design and launch—during the manufacturing or service delivery stage.
- **Staff involvement:** Employees are empowered to suggest practical cost-saving or efficiency ideas.
- **Scope:** Kaizen costing can be applied to manufacturing, administrative, and service processes.

### How Kaizen Costing Works

- **Baseline:** The current cost (standard or target) is recorded.
- **Target:** Management sets a required cost reduction (e.g., 2% per month).
- **Action:** Teams identify specific small improvements—such as reducing waste, reconfiguring workflow, or shortening setup times.
- **Review:** Results are measured, and new, lower standards are set for the next period.
- **Repetition:** The cycle repeats, creating a culture of never-ending improvement.

> **Key Term: Kaizen**
> A Japanese term meaning "change for better," referring to philosophy or practices that focus on continuous, incremental improvement.

## **KAIZEN VS. STANDARD AND TARGET COSTING**

It is important to understand where Kaizen costing fits among other cost management techniques:

> **Key Term: Standard costing**
> A method that sets a predetermined cost for products or services, against which actual costs are compared for variance analysis.
>
> **Key Term: Target costing**
> A system where the target cost is set—usually before production—by deducting desired profit from competitive market price, and design is adjusted to meet this cost.

- **Target costing** is used before production to develop a product that meets market requirements at the lowest achievable cost.
- **Standard costing** controls and measures actual costs against those set at the pre-production stage.
- **Kaizen costing** operates after launch to reduce actual costs below those pre-set amounts through continuous improvement in processes.

### **Worked Example 1.1**

A company manufactures bicycles and recently launched a new line. Last quarter, the average production cost per unit was \$100. Management expects a 2% cost reduction each month through Kaizen costing.

**How much must costs reduce in the next quarter, and what is the expected cost per unit after 3 months?**

> **Answer:**
>
> Required reduction each month: 2% of the most recent month's cost.
>
> - After 1 month: \$100 × 0.98 = \$98.00
> - After 2 months: \$98.00 × 0.98 = \$96.04
> - After 3 months: \$96.04 × 0.98 = \$94.12  
>   By the end of the quarter, the expected cost per bicycle is \$94.12.

## **BEHAVIOURAL AND ORGANISATIONAL EFFECTS**

Kaizen costing depends on the participation and motivation of all employees. Typical features of successful implementation include:

- Training and empowering staff to identify and act on improvement ideas
- Open communication and recognition of contributions
- Teamwork between operational, support, and management staff
- Measurement and feedback on cost savings achieved

> **Key Term: Kaizen team**
> A cross-functional group of employees who work together to identify, implement, and monitor small improvements in a specified process or area.

### **Worked Example 1.2**

An administrative team in a financial services company meets weekly to review procedures. Over several weeks, they identify that combining two approval forms reduces duplication, cutting processing time per client from 40 minutes to 33 minutes. What is the impact of this change?

> **Answer:**
>
> By reducing time per client, more cases can be handled per day and bureaucratic costs fall. This is a typical Kaizen improvement—small, staff-driven, measurable, and continuous.

## **BENEFITS AND LIMITATIONS OF KAIZEN COSTING**

### Benefits

- Sustained cost reductions even after the initial launch phase
- Increased staff engagement and ownership of efficiency
- Fast adaptation to changes in production or service environments
- Alignment with Total Quality Management (TQM) and Just-in-Time (JIT) systems

### Limitations

- Requires cultural commitment from management and staff
- Benefits may be slow and require persistence
- Can be difficult to quantify the impact of many small changes
- May not be suitable for one-off projects or highly automated environments with little manual intervention

### **Exam Warning**

> Avoid confusing Kaizen costing (continuous post-launch incremental cost-reduction) with target costing (pre-launch design-to-cost). In exams, questions often ask you to compare or distinguish between these techniques.

### **Revision Tip**

> In scenarios, look for clues: Kaizen is about gradual cost decline over time, driven by workforce ideas, rather than a one-off reduction at the design stage.

## **Summary**

Kaizen costing is a strategic cost management approach that emphasises ongoing, incremental cost reductions through continuous improvement and teamwork during the operating phase. Unlike standard or target costing, it remains effective after production has started, supporting sustained competitiveness through countless minor enhancements. Staff at all levels participate, but success relies on measurement, recognition, and a culture of improvement.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- The purpose and principles of Kaizen costing in cost management
- The distinction between Kaizen, standard, and target costing
- Steps in implementing Kaizen costing for ongoing improvement
- The behavioural and organisational considerations for successful Kaizen adoption
- Advantages and limitations of continuous improvement approaches
- Common exam pitfalls in distinguishing Kaizen from other costing methods

## **Key Terms and Concepts**

- Kaizen costing
- Continuous improvement
- Kaizen
- Standard costing
- Target costing
- Kaizen team


Strategic cost management - Kaizen costing and continuous improvement